Bank of America's Obvious Force

After joining the Army in the movie Stripes, the legendary John Candy vowed to emerge a "lean, mean, fighting machine." After glancing at Bank of America's (NYSE: BAC  ) third-quarter earnings yesterday, it appears the nation's third-largest bank is on track to accomplish that. The integration with FleetBoston (which was acquired in April) continues to proceed on schedule, and the merger produced cost savings of $309 million for the quarter.

With continued strength in consumer banking, earnings jumped 29% to $3.76 billion from $2.92 billion a year ago, though quite a few shares were doled out ($48 billion worth) to complete the acquisition, and dilution dragged per-share gains down by a nickel to $0.91. The bottom-line results (which were aided by a $732 million gain from the sale of mortgage-backed securities) narrowly topped estimates, despite top-line growth that came up short. Revenues jumped 29% to $12.6 billion, with lending income and fee income rising 43% and 10%, respectively.

There has been little evidence of any large-scale customer defection arising from the merger, and new relationships are being added at a healthy clip. Nearly one-third of FleetBoston locations have been "re-branded," and most metrics are either meeting or exceeding internal targets. The number of consumer checking and savings accounts grew by 537,000 and 624,000, with both on pace to top their 2 million goal. The growing customer base helped lift retail deposits 11% (on a pro-forma basis) to $400 billion.

Furthermore, more than 1.6 million new credit card accounts were established, with the help of cross-selling and an effective targeted mailing campaign. Also, more customers are enrolling in Internet banking services, and Bank of America's 11.8 million users drove online bill payment volumes 10% higher through a partnership with CheckFree (Nasdaq: CKFR  ) .

The consumer banking sector posted a 27% increase in revenues to $7.03 billion, representing more than half of the bank's total revenues. Rival Citigroup (NYSE: C  ) also reported strength from retail operations as profits from the company's global consumer division jumped 23% on a 15% rise in revenues. Bank of America's net segment income, however, was essentially flat at $1.68 billion as lower mortgage origination volume resulted in a $250 million loss from mortgage banking, versus a prior-year gain of $666 million.

Bank of America's other business segments helped pick up the earnings slack. Net income derived from commercial banking doubled to $824 million, while earnings from global corporate/investment banking and wealth management rose to $475 million (up 9%) and $469 million (up 83%), respectively. During the quarter, the company took the lead in the underwriting of mortgage-backed bonds.

Whether or not Bank of America overpaid for FleetBoston is open to debate, and merger-related charges are likely to linger in the near term. However, in the consolidating banking industry, bigger is better. And Bank of America's coast-to-coast geographic footprint, 33 million consumer accounts, and $1.1 trillion in assets stack up well next to giants such as Citigroup and J.P. Morgan Chase (NYSE: JPM  ) .

Furthermore, reduced expenses from job cutbacks, streamlined operations, and other synergies are ultimately expected to yield $1 billion in cost savings. With continued momentum in consumer banking, signs of traction in commercial lending, improving credit quality, and a rising dividend, Bank of America, at less than 12 times trailing earnings, may be a good place to deposit your investing dollars.

Looking for some help with the basics of banking? Find answers at the Fool's Banking Center.

Fool contributor Nathan Slaughter owns none of the companies mentioned.


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